Plunging Mortgage Rates Mean Refinancing Is Back on the Table for 2 Million Borrowers

It could pay to refinance now -- before rates climb again.

When mortgage rates started falling in mid-2020, many homeowners rushed to refinance their mortgages in the hopes of snagging better loan terms -- and slashing their monthly payments. But mortgage rates have been higher in 2022, and as a result, the appeal of refinancing has waned.

Things are looking different these days, though. A recent drop in mortgage rates means that refinancing could once again make sense for a lot of borrowers.

In fact, data firm Black Knight says that right now, 5 million homeowners could benefit from a refinance, compared to just 3 million two weeks ago. If you've been thinking about refinancing, now's the time to get moving.

Should you refinance your mortgage?

Refinancing your mortgage could help you lower your monthly payments. It could also allow you to take cash out of your home and use it to pay off debts or finance a renovation. But before you move forward with a refinance, you'll want to ask yourself a few key questions.

1. Can I really lower my existing interest rate that much?

When you refinance, you're charged closing costs to put a new mortgage into place. Those closing costs can amount to 2% to 5% of your loan amount (sometimes more), so for refinancing to pay off, you'll generally need to lower your rate considerably. But if you already have a low interest rate on your mortgage, then it may not pay to refinance.

2. Is my credit score in good shape?

Mortgage rates may be down right now. But if you want to snag a competitive interest rate on a home loan, you'll need solid credit. If your credit score isn't in the best shape, or if it recently took a hit, then you may want to hold off on refinancing.

3. Do I plan to stay in my home for at least a few years?

Those closing costs we just talked about? At some point, you'll break even on paying them. The question, however, is whether you intend to stay in your home long enough for that to happen.

Say you're charged $6,000 in closing costs to refinance, but doing so shaves $200 off of your monthly mortgage payments. That means it will take you 30 months just to break even, and once you've been in your home for more than 2.5 years, you'll start to actually enjoy the savings you were hoping to reap by refinancing. But if you're not sure you'll stay in your home for that long, then you probably shouldn't refinance, because doing so could actually result in you losing money rather than saving some.

You may want to jump on these lower rates

The tricky thing about mortgage rates is that they can fluctuate substantially from week to week. Sometimes, they can even rise and fall by a notable degree from one day to the next. It's important to get the timing of your refinance application right. Currently, refinancing makes sense for 2 million more borrowers compared to just two weeks ago. If you think you're part of that group, then it pays to make a quick decision -- before rates start to climb again.